Dueling Fools: Defense Turnaround?
The Rebuttals

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The Bull Rebuttal
By Kevin Spellman

ViaSat bears like Tom should pay heed to the advice of Mark Twain: "We should be careful to get out of an experience [in this case, SEC filings] only the wisdom that is in it and stop there; lest we be like the cat that sits down on a hot stove lid. She will never sit on a hot stove lid again and that is well; but also she will never sit down on a cold one anymore." You can learn much about the problems that ailed the company in previous quarters, but you learn nothing about their future.

The bear case is strictly backward-looking, a common flaw when focusing only on old numbers and ignoring what's going on outside the newer quarterly and annual reports. Pulling boilerplate out of the 10-Q to make a short case is potentially fatal.

Take Tom's bear argument about accounts receivable (A/R), and I'll add in the related days sales outstanding (DSOs). Both were uncomfortably high in previous quarters, but have now improved, with an increasing proportion of billed vs. unbilled revenues. One anchor dragging on A/R was a very aged receivable due from Astrolink, the halted broadband satellite project. That A/R has been paid. The remaining A/R is solid, with payments due from such stalwarts as Boeing (NYSE: BA) or the Defense Department. Painting the A/R issue as fatal is a common bear battle cry. This is an area where knowing the business is extremely helpful. 

The rise in A/R and DSOs has been almost exclusively due to two contracts, MIDS for the Defense Department and Connexion, the in-flight broadband service, for Boeing. Lengthening of the cycle stems from the milestone requirements embedded in these contracts. There will always be a decent-sized unbilled receivable because the company accounts for revenues by percent completion, while payments from customers often come only after certain milestones are met. They may be 75% done with a contract, with that revenue recognized, but are unable to bill for it until a milestone -- production levels or testing/approval -- is met.

I may occasionally worry about the company hitting these milestones in a timely manner, but I never fret about not getting paid. Channel stuffing? Uncle Sam is not at all "stuffable" nor a credit risk. Inventory remains at an appropriate level for the ramping business, with none in imminent jeopardy of obsolescence. This is not some optical components company, folks, where April's hot new technology is May's dinosaur. Think much longer term development and much longer product lifetimes. The UHF DAMA modem has been a staple for more than a decade!

MOAB for ViaSat shorts
There is a particularly dangerous factor for ViaSat shorts that doesn't get mentioned by the rearward-facing filing-miners. I call it the MOAB factor. It's the Mother Of All Bummers for shorts on the Morning Of A Buyout announcement. ViaSat has gathered up several long-tail defense contracts, has added in the same flavor of business with Connexion and WildBlue for commercial broadband, and is on the verge of adding several more (such as datalinks for bombs). This kind of future certainty is highly attractive to acquisitive defense firms.

The Bear Rebuttal
By Tom Jacobs

Ouch, he Twained me! What a zinger, but how very true: The investor who focuses on the past and not the future is bound to lose -- especially if in the presence of a true turnaround. Whatever financial pain I see from the trend could at least theoretically evaporate if things get better.

But let's say that my worthy opponent is right and the ship turns. The company might be in better shape, but will shareholders see any of the benefit? There has been a huge increase in diluted share count over the last seven years, and I'm not talking splits or acquisitions. Stock option grants net of cancellations have been 5.1%, 3.9%, 2.6%, 4.7%, 12.2%, and 3.2% for the latest fiscal years ending Mar. 31, 2002. Diluted shares increased almost 12% year over year to the quarter ending Dec. 31, 2002.

I don't mind management granting stock options to keep employees, as long as they are within reason and the business is growing free cash flow at a faster clip, so that the stock price gains more than make up for it. From current levels, I don't see it. 

Squeeze for shorts?
And as for the MOAB -- kudos to Kevin for an excellent moniker we all recognize from our military's newest Big Bomb -- the dreaded short squeeze is a risk. Average daily volume has dropped to 40% of December 2002's steady pace, and days to cover have more than doubled. Positive buyout news could cause some pain, which is all the more reason that shorting is for experienced investors only.

But with the evidence I see, I'm standing pat. ViaSat is a sell, and for aggressive experienced investors, a possible short.

Now, cast your vote in our poll: Who has the best argument -- bull or bear?